How do you work out what to charge for Digital Projects?
Broadly speaking, there are three main methods to estimate digital or IT projects.
Value-based pricing: This has nothing to do with the cost of doing the work – it’s all about the value the work creates. You are normally being asked to do work because the incumbent team don’t have the skills to either protect the organisation against threats or exploit new technology and ways of working for competitive advantage. That work creates value, and you should be paid in a way that reflects that new value.
Ideally, you would be paid a percentage of the amount you have saved or generated. That’s the no savings, no payment model like no win no fee lawyers. However, in technology, customers often make decisions which reduce the amount of potential savings. They redeploy people, for example, rather than make them redundant. Or they choose to re-use server rooms for other purposes rather than remove them entirely if we’re talking about a cloud deployment.
In that situation, your fee is unclear and most chief financial officers are not comfortable with an uncertain cost. From the vendor perspective, it’s clearly unfair that decisions by the client could limit your remuneration. So, the pragmatic way of doing this is to confirm the roles and abilities of the people you need to do the work and then apply a rate card price based on how much the client would have to pay to recruit these kinds of people.
That gives you a base from which you can choose to discount based on other considerations. The advantage to the client is that they get the skills without having to take on permanent employees, switching the skill base on and off as they need it, while the advantage to the company is that their staff can work on a number of clients at the same time, maximising their fee earnings while costing the company the same whether they work on one project, or 5-10 at the same time.
More conventional approaches
Parametric Pricing – also known as “bottom up” pricing. This means identifying the tasks involved in completing a project, and pricing them all individually. You add a contingency estimate to this summed up cost of 20% and then that’s the commercial offer. For me, this is the method which has been most accurate and straightforward in my experience. You analyse the requirements, define the roles which need to be involved, speak to the people performing these roles to get a time estimate and then deliver the project. You’re covered against over-optimistic estimation by the contingency you’ve built in.
Analogous or Top Down Pricing
This is where you base the price for a client’s required works on real world experience, history and precedent. This is a very controllable method if the people you work with have been keeping accurate notes on their actions in previous projects. Most of the time, the projects you price will fall into certain categories, particularly if you are a niche player or provider of defined IT services. The idea is that you develop an accurate knowledge of certain types of projects, like file migration activities for instance, and then you can get a baseline which you can scale up or down based on what you learned about the volume of files to be migrated. So if you gave client A a price for moving X volume of Y data, you will know how to price up Client B when they ask you to do something similar. If Client B is slightly different to Client A, you add in an uncertainty element, adjusting this up or down based on your gauging of the client from your discovery and commercial negotiations.
The challenge is that we are all attuned to look for patterns, and sometimes we see similarities between clients which don’t actually exist on closer inspection. Or the client who has been easy to work with during the sales and discovery conversations actually turns out to be more complicated (or less) when you’re in the throes of project delivery, with personnel changes or an apparent change in priority once you appear to be providing a solution to their initial difficulty.
For me, of the three approaches, Parametric Pricing is the easiest for the client to understand and the easiest to defend when clients want to haggle.